NOTE

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis and Accounting and Principles of Consolidation

The Company prepares its consolidated financial statements in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). The Company operates in

one

business segment.

The accompanying consolidated financial statements include the accounts of the Company and its direct and indirect wholly-owned subsidiary, PLx Opco Inc. All significant intercompany balances and transactions have been eliminated within the consolidated financial statements.

Use of Estimates

The preparation of our consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. In the accompanying consolidated financial statements, estimates are used for, but

not

limited to, determining the fair value of tangible and intangible assets, the fair value of warrant liability, the fair value of stock-based compensation, allowance for inventory obsolescence, allowance for doubtful accounts, contingent liabilities, fair value and depreciable lives of long-lived assets, and deferred taxes and associated valuation allowance. Actual results could differ from those estimates.

Foreign Currency

The functional currency of our international subsidiary has been designated as the U.S. dollar. Foreign currency transaction gains and losses, excluding gains and losses on intercompany balances where there is

current intent to settle such amounts in the foreseeable future, are included in the determination of net loss. Unless otherwise noted, all references to “$” or “dollar” refer to the U.S. dollar.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of

three

months or less when purchased to be cash equivalents. The Company maintains cash and cash equivalents in a financial institution that at times exceeds federally insured limits. Management believes that the Company’s credit risk exposure is mitigated by the financial strength of the banking institution in which the deposits are held. As of

December 31, 2019,

the Company had cash and cash equivalents of

$14.0

million in U.S. bank accounts which were

not

fully insured by the Federal Deposit Insurance Corporation.

Allowance for Uncollectible Accounts Receivable

An allowance for uncollectible accounts receivable is estimated based on historical experience, credit quality, age of the accounts receivable balances, and economic conditions that

may

affect a customer’s ability to pay. The allowance for uncollectible accounts receivable was

zero

as of

December 31, 2019

and

2018,

respectively.

Inventory

Inventory is stated at the lower of cost or net realizable value, using the average cost method. Inventory as of

December 31, 2019

and

2018

was comprised of raw materials for the manufacture of VAZALORE. The Company regularly reviews inventory quantities on hand and assesses the need for an allowance for obsolescence. The allowance for obsolete inventory was

$0.5

million and

$1.0

million as of

December 31, 2019

and

2018,

respectively, resulting in net inventory of

zero

for both periods.

Fair Value of Financial Instruments

All financial instruments classified as current assets and liabilities are carried at cost, which approximates fair value, because of the short-term maturities of those instruments. The fair value of the term loan approximates its face value of

$4,375,000

based on the Company’s current financial condition and on the variable nature of the term loan’s interest feature as compared to current rates. For disclosures concerning fair value measurements, see Note

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. The Company capitalizes additions that have a tangible future economic life. Maintenance and repairs that do

not

improve or extend the lives of property and equipment are charged to operations as incurred. Depreciation expense is computed using the straight-line method over the estimated useful lives of each class of depreciable assets. Management reviews property and equipment for possible impairment whenever events or circumstances indicate the carrying amount of an asset

may

not

be recoverable. If there is an indication of impairment, management prepares an estimate of future cash flows (undiscounted and without interest charges) expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized to write down the asset to its estimated fair value.

Leases

As described further below in this Note

the Company adopted new accounting guidance for leases effective

January 1, 2019.

Subsequent to the adoption at the inception of a contract, the Company determines if the arrangement is, or contains, a lease. Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Rent expense is recognized on a straight-line basis over the lease term.

The Company has made certain accounting policy elections whereby the Company (i) does

not

recognize ROU assets or lease liabilities for short-term leases (those with original terms of

-months or less) and (ii) combines lease and non-lease elements of its operating leases. Operating lease ROU assets are included in leased assets and operating lease liabilities are included in other current and non-current liabilities in the Company’s consolidated balance sheets. As of

December 31, 2019,

the Company did

not

have any finance leases.

Goodwill

Goodwill is

not

amortized but is subject to periodic review for impairment. Goodwill is reviewed annually, as of

October 31,

and whenever events or changes in circumstances indicate that the carrying amount of the goodwill might

not

be recoverable. Management performs its review of goodwill on its

one

reporting unit.

The Company performs a

one

-step test in its evaluation of the carrying value of goodwill, if qualitative factors determine it is necessary to complete a goodwill impairment test. In the evaluation, the fair value of the relevant reporting unit is determined and compared to the carrying value. If the fair value is greater than the carrying value, then the carrying value is deemed to be recoverable, and

further action is required. If the fair value estimate is less than the carrying value, goodwill is considered impaired for the amount by which the carrying amount exceeds the reporting unit’s fair value, and a charge is reported in impairment of goodwill in the Company’s consolidated statements of operations.

The Company has

not

identified any events or changes in circumstances that indicate that a potential impairment of goodwill occurred during the years ended

December 31, 2019

2018.

Revenue Recognition

As described further below in this Note

January 1, 2018,

the Company adopted Topic

606,

Revenue from Contracts with Customer using the modified retrospective method applied to those contracts which were

not

completed as of

January 1, 2018.

The Company analyzes contracts to determine the appropriate revenue recognition using the following steps: (i) identification of contracts with customers; (ii) identification of distinct performance obligations in the contract; (iii) determination of contract transaction price; (iv) allocation of contract transaction price to the performance obligations; and (v) determination of revenue recognition based on timing of satisfaction of the performance obligation. The Company recognizes revenues upon the satisfaction of its performance obligations (upon transfer of control of promised goods or services to customers) in an amount that reflects the consideration to which it expects to be entitled to in exchange for those goods or services. Deferred revenue results from cash receipts from or amounts billed to customers in advance of the transfer of control of the promised services to the customer and is recognized as performance obligations are satisfied. When sales commissions or other costs to obtain contracts with customers are considered incremental and recoverable, those costs are deferred and then amortized as selling and marketing expenses on a straight-line basis over an estimated period of benefit.

The Company’s current sole revenue arrangement is a cost-reimbursable federal grant with the National Institutes of Health. The Company recognizes revenue on this grant as grant-related expenses are incurred by the Company or its subcontractors. The Company recognized

$0.6

million and

$0.8

million of revenue under this arrangement during the years ended

December 31, 2019

and

2018,

respectively. This grant will be completed in early

2020.

The Company has

not

incurred incremental costs to obtain contracts with customers or material costs to fulfill contracts with customers and did

not

have any material contract assets or liabilities as of

December 31, 2019

and

December 31, 2018.

Research and Development Expenses

Costs incurred in connection with research and development activities are expensed as incurred. Research and development expenses consist of direct and indirect costs associated with specific projects, manufacturing activities, and include fees paid to various entities that perform research related services for the Company.

Stock-Based Compensation

The Company recognizes expense in the consolidated statements of operations for the fair value of all stock-based compensation to key employees, nonemployee directors and advisors, generally in the form of stock options and stock awards. The Company uses the Black-Scholes option valuation model to estimate the fair value of stock options on the grant date. Compensation cost is amortized on a straight-line basis over the vesting period for each respective award. The Company accounts for forfeitures as they occur.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to temporary differences between financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established when necessary to reduce deferred income tax assets to the amount expected to be realized.

Tax benefits are initially recognized in the financial statements when it is more likely than

not

that the position will be sustained upon examination by the tax authorities. Such tax positions are initially, and subsequently, measured as the largest amount of tax benefit that is greater than

50%

likely of being realized upon ultimate settlement with the tax authority, assuming full knowledge of the position and all relevant facts.

The Company currently has tax returns open for examination by the applicable taxing authority for all years since

2015.

Income (Loss) Per Share

In periods of net loss, basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period. The Series A convertible preferred stock (the “Series A Preferred Stock”) contains non-forfeitable rights to dividends, and therefore are considered to be participating securities; in periods of net income, the calculation of basic earnings per share excludes from the numerator net income attributable to the Series A Preferred Stock and excludes the impact of those shares from the denominator.

In periods of net loss, diluted loss per share is calculated similarly to basic loss per share because the impact of all potential dilutive common shares is anti-dilutive. In periods of net income, diluted earnings per share is computed using the more dilutive of the “two class method” or the “treasury method.” Dilutive earnings per share under the “two class method” is calculated by dividing net income available to common stockholders as adjusted for the participating impacts of the Series A Preferred Stock, by the weighted-average number of shares outstanding plus the dilutive impact of all other potential dilutive common shares, consisting primarily of common shares underlying common stock options and stock purchase warrants using the treasury stock method. Dilutive earnings per share under the “treasury method” is calculated by dividing net income available to common stockholders by the weighted-average number of shares outstanding plus the dilutive impact of all potential dilutive common shares, consisting primarily of common shares underlying common stock options and stock purchase warrants using the treasury stock method, and convertible preferred stock using the if-converted method.

None

of the potential dilutive securities had a dilutive impact during the years ended

December 31, 2019

and

2018.

The number of anti-dilutive share for the years ended

December 31, 2019

and

2018

consisting of common shares underlying (i) common stock options, (ii) stock purchase warrants, and (iii) convertible preferred stock which have been excluded from the computation of diluted income per share, was

10,547,735

and

3,911,302

shares, respectively.

Recent Accounting Developments

Recently Adopted Guidance

May 2014,

the Financial Accounting Standards Board (the “FASB”) issued guidance for revenue recognition for contracts, superseding the previous revenue recognition requirements along with most existing industry-specific guidance. The guidance requires an entity to review contracts in

five

steps:

) identify the contract,

) identify performance obligations,

) determine the transaction price,

) allocate the transaction price, and

) recognize revenue. The new standard will result in enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenue arising from contracts with customers. In

August 2015,

the FASB issued guidance approving a

one

-year deferral, making the standard effective for reporting periods beginning after

December 15, 2017,

with early adoption permitted only for reporting periods beginning after

December 15, 2016.

March 2016,

the FASB issued guidance to clarify the implementation guidance on principal versus agent considerations for reporting revenue gross rather than net, with the same deferred effective date. In

April 2016,

the FASB issued guidance to clarify the implementation guidance on identifying performance obligations and the accounting for licenses of intellectual property, with the same deferred effective date. In

May 2016,

the FASB issued guidance rescinding SEC paragraphs related to revenue recognition, pursuant to

two

SEC Staff Announcements at the

March 3, 2016

Emerging Issues Task Force meeting. In

May 2016,

the FASB also issued guidance to clarify the implementation guidance on assessing collectability, presentation of sales tax, noncash consideration, and contracts and contract modifications at transition, with the same effective date. The Company adopted this guidance effective

January 1, 2018

on a modified retrospective basis and it did

not

have any impact on the consolidated financial statements.

August 2016,

the FASB issued guidance on the classification of certain cash receipts and cash payments in the statement of cash flows, including those related to debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance, and distributions received from equity method investees. The guidance is effective for fiscal years beginning after

December 15, 2017.

Early adoption is permitted. The Company adopted this guidance effective

January 1, 2018

on a retrospective basis and it did

not

have a material impact on the consolidated financial statements.

February 2016,

the FASB issued guidance for accounting for leases. The guidance requires lessees to recognize assets and liabilities related to long-term leases on the balance sheet and expands disclosure requirements regarding leasing arrangements. The guidance is effective for reporting periods beginning after

December 15, 2018.

The guidance must be adopted on a modified retrospective basis and provides for certain practical expedients. The Company adopted this guidance effective

January 1, 2019

using the following practical expedients:

●

the Company did

not

reassess if any expired or existing contracts are or contain leases; and

●

the Company did

not

reassess the classification of any expired or existing leases.

Additionally, the Company made ongoing accounting policy elections whereby the Company (i) does

not

recognize ROU assets or lease liabilities for short-term leases (those with original terms of

-months or less) and (ii) combines lease and non-lease elements of its operating leases.

Upon adoption of the new guidance on

January 1, 2019,

the Company recorded a ROU of

$712,534

and recognized a lease liability of

$789,543,

with

resulting cumulative effect adjustment to retained earnings.

June 2018,

the FASB issued guidance with respect to the accounting for nonemployee share-based payment awards. The guidance generally aligns the accounting for nonemployee awards to that for employees. The guidance is effective for fiscal years beginning after

December 15, 2018.

The Company adopted this guidance on

January 1, 2019

and the adoption did

not

have a material impact on its financial statements.

Unadopted Guidance

August 2018,

the FASB issued guidance with respect to the disclosure requirements for fair value measurements. The guidance intends to improve the effectiveness of the disclosures relating to recurring and nonrecurring fair value measurements. The guidance is effective for fiscal years beginning after

December 15, 2019.

Portions of the guidance are to be adopted prospectively while other portions are to be adopted retroactively. Early adoption is permitted. The Company is currently evaluating the impact, if any, that this guidance will have on the consolidated financial statements.

The Company does

not

believe that any other recently issued effective standards, or standards issued but

not

yet effective, if adopted, would have a material effect on the accompanying consolidated financial statements.

Reclassifications

Certain reclassifications have been made to the prior-year financial statements to conform to the current-year presentation. These reclassifications had

effect on the reported results of operations.

Subsequent Events

The Company’s management reviewed all material events through the date the consolidated financial statements were issued for subsequent event disclosure consideration.